The Philadelphia Gas Works: Challenges and Solutions
The Philadelphia Gas Works (PGW), long an ailing City-owned company, has improved its performance in recent years. However, significant structural issues unique to PGW require attention if the utility is to become a working asset for the city and lower its costs to customers, according to a study released today by the Economy League of Greater Philadelphia. The study concludes that improving PGW's current condition not only will provide Philadelphians with less expensive gas service but also will enhance its value for that time when market conditions are more favorable for a potential sale or other conveyance.

"The Philadelphia Gas Works: Challenges and Solutions," commissioned by The Pew Charitable Trusts and the William Penn Foundation, analyzes PGW's current status and challenges and outlines future ownership scenarios.

Following a change in senior management seven years ago, PGW has increased collections and repaid an aging loan from the City. These developments have improved PGW's financial outlook. Yet, PGW's future is problematic due to the structure and environment of its operation:
  • Convoluted Governance: More than 30 elected and appointed officials have a role in PGW's governance, a system that increases costs and diffuses accountability.
  • Shrinking and Poorer Customer Base: One in four PGW residential customers is subsidized. The most popular subsidy caps bills without incentivizing conservation. The result is that subsidized customers use 47 percent more gas on average than full rate-paying customers.
  • Starved for Capital: Despite paying off its loan from the City, PGW's long-term debt burden is rising.
  • Rising Energy Costs: Rising energy costs mean even higher bills to market rate customers as they pay morefor their own usage as well as more to subsidize the increased costs of PGW's low-income customer program. This situation could lead to an increase in delinquent payments.
  • High Labor Costs: Staffing ratios are higher than at comparable utilities, with the number of employees per customer double the national average.

These structural issues have left Philadelphia Gas Works in a generally uncompetitive and financially precarious position. For consumers, the result is that their rates are much higher than those of peer cities. Meanwhile, the City's balance sheet carries PGW's growing capital debt while gaining no revenue from this considerable investment. No other city confronts this situation, and as a result, no model solutions exist for PGW to emulate.

Given this situation, the analysis details three potential scenarios for change: selling assets to a private firm, retaining City ownership, and creating a new authority. While the current volatility of credit markets makes a sale or even conveyance to an authority difficult, market conditions underscore the importance of taking the more immediate steps outlined in this report to upgrade PGW's condition as a City-owned entity and increase the value of the utility for potential future options.
2008

Copyright 2009 Economy League. All rights reserved.